The build-versus-buy debate continues as more non-bank enterprises decide to step into the world of financial services.
Introducing a loan product embedded within an existing product offering can be a significant value-add for clients, and a lucrative new revenue stream for corporates. Yet weighing the pros and cons of developing a proprietary lending solution in-house versus collaborating with a third-party technology partner can be a difficult process.
Banks and non-bank enterprises alike can benefit from both sides, but according to LoanPro Chief Revenue Officer and Co-founder Lloyd Roberts, there are advantages to collaboration. Speaking with PYMNTS, Roberts discussed why speed-to-market isn’t the only advantage of buying over building. Plus, he weighed in on the Financial Stability Board’s recent warning that raised concerns over the risks of outsourcing financial technologies.
One of the most significant advantages of partnering with a third-party technology provider is speed to market. Roberts noted that he has encountered LoanPro clients that have attempted to build a lending solution in-house, but struggle to bring that project to fruition.
“There is obviously some value to building, but oftentimes, lenders that get into the business of building software get 90 percent of the way to the finish line, and they’re just not able to get all the way across,” he said. “We’ve had many enterprise lenders that spent well north of $1 million building in-house platforms, and ultimately had to scrap it.”
This strategy poses another issue that Roberts said reveals another key advantage of collaboration.
Even if an entity is able to successfully build and launch a lending product, that solution is not easily adjusted, and additional products and services cannot always be efficiently developed. At the heart of this pain point is the issue of future-proofing any lending solution launched by an entity, whether it’s a bank or otherwise.
“Even if they successfully build, they usually do it narrowly enough to meet the minimum requirements of their first offering,” Roberts said, adding that scaling beyond that initial rollout is rarely easy with proprietary technologies.
To achieve a future-proofed product offering, third-party technology providers must prioritize API integrations and take a configuration-first approach to their offerings, key factors that allow for any loan product to be tweaked and adjusted depending on ever-changing market needs.
Choosing The Right Partner
Despite the advantages of outsourcing lending technology, there are drawbacks. Earlier this week, the Financial Stability Board (FSB) placed some of those drawbacks in the spotlight, issuing a warning to traditional banks that outsource key technology.
Its discussion paper noted the “common concern about the possibility of systemic risk arising from concentration in the provision of some outsourced and third-party services to financial institutions.”
Indeed, if key functionality is outsourced to a third party, any event that affects that third party could jeopardize vital products and services of a lender, whether it’s a bank or otherwise. Roberts acknowledged the risk and emphasized that entities can mitigate that risk by choosing the right partner.
“That’s a big ‘if,’ however,” he said. “It’s a real concern. Even if the concern isn’t about the servicing company going out of business, they can put the handcuffs on you, for lack of a better term.'”
In addition to ensuring that third-party technology partners have embedded flexibility within their offerings to future-proof any products, picking the right partner also means turning to collaborators that can decouple the technology stack from the servicing side of the business. This gives more control back to the lending company to not only tweak or add new products, but to also take the lead in servicing the loans without any impact on the technology they’re using.
Bringing Non-Banks On Board
For non-bank and non-FinTech companies, the opportunity to introduce a loan product from within an existing suite of services is a potentially lucrative strategy. It’s also a tactic often intended to future-proof organizations as demand for embedded lending and other financial services grows among end customers.
For these entities, the obvious decision is to buy, not build, as these firms often have little to no experience in financial services. Though these organizations need to be diligent about the technology partners with which they work, companies across all industries may find that the opportunities in introducing a new revenue stream and improving the customer experience are too significant to pass up.
According to Roberts, the market will see a lot more of this trend in the years ahead.
“We’re seeing a lot of companies that you wouldn’t think of as lenders, that have actually become lenders at this point,” Roberts said of this expanding trend. “I think over the next decade, we’re going to see more companies lean into the concept of ‘everyone is a lender.’ It’s such an easy add-on.”